A second property can serve different purposes: it might be a vacation home you visit for leisure, a rental you own for income, or a mix of both. Regardless of why you buy extra real estate, the tax consequences can differ substantially from those that apply to your primary home. Before you begin searching for another property, understand how Canada taxes second homes so you won’t be surprised when tax season arrives.
Primary residences vs. secondary properties
In Canada, tax treatment depends on how a property is used. Your primary residence—the home you ordinarily live in—is generally sheltered from capital gains tax when sold through the principal residence exemption. That protection can, in some cases, apply to a vacation property if it is “ordinarily inhabited.” Although the definition is not precise, it essentially requires that you live in the property for at least part of the year. There is a limited exception when you move and briefly own two homes, but ordinarily only one property may be designated your primary residence at a time. When you own multiple properties, it’s usually best to claim the exemption on the one that has appreciated the most.
Most rental and investment properties do not qualify for the principal residence exemption. When you sell a rental or other investment property and it has risen in value, the gain is typically subject to capital gains tax.
Capital gains tax on a second property in Canada
If you cannot apply the principal residence exemption to a property sale, the increase in value is subject to capital gains tax. Capital gains are taxed more efficiently than many other forms of income because only a portion of the gain is included in taxable income. As of the change effective June 25, 2024, the inclusion rate is tiered: 50% of capital gains up to $250,000 in a calendar year are included in income, while gains above that threshold are included at a higher rate of 66.67%.
To determine the taxable capital gain, start by calculating the property’s adjusted cost base (ACB). The ACB begins with the purchase price and is adjusted upward for eligible additions like legal fees and real-estate commissions and for capital improvements that increased the property’s value. Certain deductions may also apply.
One complexity for landlords and investors is depreciation, known in Canada as capital cost allowance (CCA). Buildings (but not land) may be depreciated for tax purposes by claiming CCA over time. When you sell the property, the undepreciated capital cost (UCC)—the original cost minus previously claimed CCA—affects taxation: any CCA previously claimed that exceeds the UCC is “recaptured” and taxed as ordinary income. Any remaining profit beyond the UCC is treated as a capital gain.
For example, imagine you purchased a rental property for $1,000,000 and claimed $200,000 of CCA over the years. You then sell the property for $1,300,000. The numbers break down like this:
- Original cost: $1,000,000
- CCA claimed: $200,000
- Undepreciated capital cost (UCC): $800,000
At sale, the $200,000 in previously claimed CCA is recaptured and taxed as income. The remaining $300,000 of appreciation ($1,300,000 sale price minus $1,000,000 original cost) is a capital gain. Applying the 2024 tiered inclusion rates results in $158,333.33 of taxable capital gains (($250,000 x 50%) + ($50,000 x 66.67%)). Combined with the $200,000 recapture, you would report $358,333.33 as taxable income on your return related to this disposition.
Capital expenses vs. current expenses: What’s the difference?
It’s important to distinguish between capital expenses and current (or operating) expenses because they are treated differently for tax purposes. Capital expenses are investments that extend the useful life of the property or increase its overall value, and they are added to the ACB and may be depreciated through CCA. Typical capital improvements include:
- Replacing the roof
- Installing new windows that improve energy efficiency or value
- Upgrading plumbing or electrical systems
By contrast, current expenses maintain the property’s existing condition and are deductible in the year they are incurred. These are the routine costs of owning and operating a rental property, for example:
- Mortgage interest on the property
- Property taxes and insurance
- Repair work and cosmetic maintenance, such as fixing broken fixtures or repainting
Can you claim a rental loss?
If, in a given taxation year, your allowable rental expenses exceed your rental income, you may report a rental loss. That loss can offset other forms of income, such as employment or investment income, reducing your overall tax burden. While claiming CCA can lower taxable rental income, tax rules generally prevent using CCA to create or increase a rental loss solely to reduce other income. In other words, you cannot typically use depreciation claims to manufacture a deductible loss.
To claim a rental loss, you must demonstrate that you are actively trying to generate rental income. Evidence might include advertising the property, working with a rental agent, and setting rent at market rates. A vacant property can still qualify for these purposes, provided you can show a genuine effort to rent it. If the tax authority concludes the property was not genuinely offered for rent or that you had no reasonable expectation of profit, the claimed loss could be disallowed.
Whether your second property is primarily for enjoyment or for earning income, the tax implications are significant. Understand how principal residence rules, capital gains inclusion, CCA recapture, and the difference between capital and current expenses affect your situation so you can plan purchases, maintenance, and eventual disposition with taxes in mind.
Read more about buying a second home:
- Buying a second home: How it works in Canada
- How someone can qualify as a first-time home buyer twice
- Using home equity to buy a second home
- How much down payment is needed on a second home?
- Mortgage rules when buying a second property in Canada
- Mortgage renewal calculator